Smallest clients being left behind?

However, even among the survey participants who said their firms haven’t adopted this kind of policy explicitly, there is a shift in this direction. For example, some survey participants said their firms are helping advisors off-load small clients by transferring those accounts to rookie advisors or to automated investment platforms such as robo-advisors.

“We have re-segmented our smallest clients to the robo- advisor side,” says a chief CO (CCO) of an investment dealer in Alberta. “We still want to support our smaller clients, but we know they have a specific cost associated with them.”

Adds a CO with a dual-platform (both securities and mutual funds) dealer in Ontario: “We do say to advisors, ‘If you can’t serve a client, don’t kid yourself to take on that client.’ We’re encouraging [our advisors] to transition their smaller clients to the [other] facilities that we have.”

Among the firms that have a minimum account size for clients, the average is $392,857, according to the results of the Report Card. The rising costs of compliance, which makes serving each client more expensive, is driving this phenomenon, many survey participants said.

“The cost of regulation is increasing and we have to keep [to a minimum account threshold] to be profitable,” says a CCO with an exempt-market dealer in British Columbia.

With regulators contemplating more dramatic regulatory changes, such as implementing a “best interest” standard and banning embedded commissions, COs and company executives said, more firms will be forced to abandon their smaller accounts.

“A huge concern with the new regulations is what’s going to happen,” says a CCO with a mutual fund dealer in Ontario. “Advisors are going to be forced to drop their smallest clients.”

Even at some firms that don’t have a policy in place regarding account size, advisors still tend to focus on clients with more investible assets, survey participants said.

“This happens, to some degree, naturally,” says a CCO with a mutual fund dealer in Alberta. “Advisors have to manage their own time.”

However, some COs and company executives adamantly oppose the idea of neglecting clients with fewer investible assets – even if retaining these clients means the firm will lose money on some accounts.

“These are the people who need the advice the most,” says a CCO with a mutual fund dealer in B.C. “They don’t have the ability to make investment mistakes. I’m angry about this issue.”

Adds a CEO of an investment dealer in Ontario: “I’m fully against [dropping small accounts]. How is that in the best interest of the public?”

Some survey participants pointed out that even if clients have limited assets initially, small accounts can become larger and more profitable over time.

For regulators, the prospect of firms abandoning small accounts is a concern. Says Mark Gordon, president and CEO of the Mutual Fund Dealers Association of Canada (MFDA): “We haven’t seen [this abandonment], but I think it should be a concern for all regulators if that does increase, because it really does [reduce] access to advice for the average retail investor. If that access is reduced, then we should all be concerned.”

The trend may be less prominent in the mutual fund channel compared with other investment industry channels, Gordon says, as mass affluent households are a key demographic for MFDA firms.

“The MFDA platform is the most accessible distribution model for average retail investors in Canada,” he says, adding that 82% of the households that MFDA member firms serve have less than $100,000 to invest.

In the securities space, meanwhile, there is anecdotal evidence of firms shifting smaller accounts to robo-advisors and “order execution only” services (a.k.a. discount brokers), according to Andrew Kriegler, president and CEO of the Investment Industry Regulatory Organization of Canada (IIROC).

“As the spectrum of service offerings gets broadened, firms and their clients will choose the service offering – the ‘delivery channel,’ if you want to call it that – that’s most appropriate for them,” Kriegler says.

As technology evolves and new service channels emerge, IIROC will focus on ensuring that its regulations adapt to those changes. Aside from those efforts, however, Kriegler suggests, IIROC won’t interfere on the issue of small accounts.

“IIROC doesn’t take the position that we should be dictating the business models of firms,” he says. “The important thing from the regulatory perspective is that, as the spectrum of service offerings continues to broaden, the regulators and the regulatory model keep up with the spectrum of service offerings.”

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